Association of Chartered Certified Accountants (ACCA) Certification Practice Test

In the long run, how is the firm's supply curve represented?

1. By the average cost (AC) curve

2. By the marginal cost (MC) curve, irrespective of slope

3. By a fixed quantity of output

4. By the average variable cost (AVC) curve

The correct answer is: By the marginal cost (MC) curve, irrespective of slope

In the long run, a firm's supply curve is represented by the marginal cost (MC) curve, which is critical for understanding how firms decide the quantity of goods to produce based on price levels. The MC curve reflects the additional cost incurred from producing one more unit of output. In competitive markets, firms will continue to produce until the marginal cost of production equals the market price. At this point, firms are maximizing their profit because they are producing the quantity of output where they can earn revenues that just cover their costs, ensuring sustainability in long-term operations. Furthermore, the MC curve typically rises due to diminishing returns, which aligns with the behavior of firms as they scale production. Firms will adjust their output in response to changes in market prices, leading to a supply curve that is a reflection of the MC at different price levels. This understanding emphasizes that the long-run supply curve is not merely about average cost or fixed outputs but is entirely driven by the marginal costs associated with production decisions made by firms.